The CO2 Challenge for Passenger Cars in Europe by Patrick ten Brink of IEEP Lyon 5 December 2006

1.
The CO2 Challenge for Passenger Cars in Europe
and the Potential Role and Impacts of Emissions
Trading
Patrick ten Brink
Senior Fellow and Head of Brussels Office
Institute for European Environmental Policy (IEEP)
ptenbrink@ieep.eu
www.ieep.eu
Elements build on work by the IEEP Transport Team
Malcolm Fergusson & Ian Skinner
and partners TNO, CAIR and LAT
Lyon
5 December 2006

2.
Presentation Structure
• Context – history and emissions from transport
• The strategy and its measures
• The performance and the remaining challenge
• Insights on instruments, targets and costs

10.
Passenger Cars CO2 Strategy: 3 pillars
EU objective: To achieve a fleet average of new passenger car of 120 g CO2/km by
2012 (equivalent to 4.5 l/100 km diesel or 5l/100km gasoline)
Three pillars
Agreements with car industry
Negotiated in 1999/2000 with the European, Japanese and Korean car manufacturers
associations (resp. ACEA, JAMA & KAMA)
Member States provide independent monitoring data on new cars sold
Target: 140g CO2/km by 2008/2009 Annual Joint Reports
Consumer information
Directive 1999/94/EC adopted in December 1999 and amended in 2003
Possible future improvements: harmonised label with energy efficiency classes, and inclusion
of light commercial vehicles in addition to cars
Fiscal measures
July 2005 Commission proposal for a Council directive (COM(2005)261) aims at requiring MS
that have taxes to base their calculation on CO2 emissions
Currently being discussed in Council
Annual Communications to the Council and Parliament - see
Commission web pages: EU CO2 and cars strategy:
Source: DGENV Presentation http://ec.europa.eu/environment/co2/co2_home.htm

16.
How well are manufacturers on track?
Different challenges for different manufacturers
Source: Oct 25 T&E brand by brand progress report

17.
The CO2 challenge
Increasingly serious concern that the current agreement
targets will not be reached
Increasing realisation that a new self commitment will not
likely result in the 120g/km target being achieved.
Increasing political discourse on need for strict targets.
But how, much will this cost, and what can help reduce the
cost?
Studies for DGENV by IEEP, TNO and CAIR
Study for DGENT by TNO, IEEP and LAT

19.
Aim of the work
The aim of the service contract was to assess the impacts of trading
scheme(s) that would allow the target of 120g/km average specific
CO2 emissions from new registrations of passenger cars to be met by
2012.
Assessment of impact on manufacturers, society and consumer covered the following
aspects:
• Manufacturer: costs, potential problems of vehicles not meeting requirements and
not being allowed on the market, trading costs and benefits
• Society: as above, including the value of fuel savings but excluding taxes
• Consumer: impact on availability of vehicles, up front price effect and savings.
• Environment: CO2 and fuel savings.

20.
Targets and Instruments
The work looked at 3 types of targets and three instruments:
• Targets
• a % reduction from a reference year,
• a sloped target curve linked to utility criteria (several variations
assessed),
• and a fixed emissions target to be met by all (120g/km)
• Instruments:
• Emission reduction requirements for individual vehicles;
• a manufacturer’s bubble (ie the manufacturer as a whole can
meet the target, effectively allowing burden within the
manufacturer’s fleet); and
• a trading scheme (ie that allows trading between all
manufacturers and hence effectively sharing the burden across the
industry as a whole).

24.
Some results – Net Costs to Society
• Net societal costs per car to meet 120g/km are of the order of 1-2%
of the cost of a car.
• An average cost can be as low as 127 Euros/car or 252 Euros/car
average depending on what discount rate is used (0% or 5% real
respectively).
• The costs for society as a whole amounts to a total of 1.84 billion
Euros/year under the lower cost targets and instruments (trading
route).
• This used conservative oil prices (lower than current)
• This excludes benefits of reducing CO2 and other pollutants

25.
Cost to Manufacturers
• Manufacturer costs of meeting the 120g/km target amount
to on average 577 Euros/car for the lowest cost
target/instrument.
• This amounts to 8.36 billion Euros/year for new
registrations in EU-15 in 2012.
• These figures assume that no costs are passed through to
consumers, nor does it reflect that potential for cost
reductions of measures over time.
• Therefore, real costs to manufacturers will probably be
significantly lower, and in cases, if and where full pass
through is possible, then costs are considerably lower.
• Pass through is facilitated by consumer benefits

27.
Costs to consumers
• In many cases, the cost to the consumer is negative – ie the
changes bring a net financial benefit.
• Car prices are expected to rise by on average around
1200Eur (full pass through of costs + taxes and margins),
• for the cheaper options the fuel savings benefits outweigh
the costs at the 0% discount rate.
• In reality, however, consumers probably apply a rather high
discount rate to future benefits, so may not fully appreciate
this benefit.
• On the other hand the consumer benefit is extremely
sensitive to fuel price assumptions;
• with fuel prices at current levels, more of the options yield
net benefits than the study, and consumer acceptance
should increase as a result.

29.
Insights on Trading
• CO2 credits are traded among manufacturers in g/km per vehicle units
– ie different units than in the EU-ETS.
• Trading can reduce vehicle costs (excl. taxes and margins) by up to
410 Euros/car which = nearly 6 bn Euros/year. (cf 120 g/km fixed per
car target)
• The advantages of trading are much more moderate for other targets,
ranging from close to zero for the % reduction options to 400 – 2,500
million Euro for the other target-instrument combinations.
• Trading volumes range between 201 million Euro with % reduction
case, up to 2.57 billion with a fixed target.
• Note that trading volumes relate to targets defined at the manufacturer
level. There is substantially more internal trading within each
manufacturer, which underlines the benefits of a bubble approach
relative to the car/segment specific approach.
• Buyers and sellers are often very different depending on the target and
instrument type.

30.
Cost of Reducing CO2
• For options with trading the value of the traded credits = the
marginal costs of further CO2 reduction (expressed in
Euro/(g/km).
• The marginal costs vary little between target / instrument mixes
– around 50 Euro/(g/km).
• Marginal costs to society are 141 to 174 Euros/tonne CO2 with
trading (interest rate 0% and 5% respectively),
• The average costs are much lower at 34 to 67 Euros/tonne
CO2 (interest rate 0% and 5% respectively).
• Prices are higher than currently under the ETS – hence while
there are benefits of trading generally, joining any automotive
trading scheme to EU ETS would lead to the automotive
industry not meeting the 120g/km target. Also complications of
different use of terms under trading schemes.

33.
Why are they higher ?
• The translation from retail price data obtained from literature to
manufacturer costs has been done with a different factor (1.44 instead of
2.0), resulting in higher input on the manufacturer costs;
• Note that this has no effect on cost to consumers
• The effects of autonomous weight increase have been modelled with a
different formula resulting in a higher amount of additional CO2-
emissions to be compensated;
• This assumes continued move toward heavier cars
• Cost and CO2-reduction data for individual options have been newly
estimated taking into account new literature data, information from
industry and evolved expert judgement;
• The resulting overall CO2-reduction of packages of measures that target
engine and powertrain efficiency has been assessed more
conservatively
• This assumes that manufacturers will less often be able to choose to most cost
effective efficient package of option

34.
Weakness of the approach
• Ex ante assessment of costs have almost systematically been
shown to overestimate the costs - ex-post studies have shown
this true retrospectively.
• Cost data tends to takes no or little account of innovation /
learning – based on costs now
• Oil price scenarios used are relatively conservative
• Some conservative estimates used, pushing prices up.
• Assumptions on future weight growth may or may not end up
being true – if not then the costs are an over-estimate. (and if we go
for heavier cars even faster then an underestimate of course).
• Focuses on costs to one set of industry players. Others will make
money on it. Certainly less dramatic a cost to Europe plc, and in fact
not necessarily a cost.

35.
General conclusions
• Reducing CO2 from transport-passenger cars is vital
• It is a major technological and social challenge
• The existing policy instruments are not proving as effective as hoped
• There is a need for additional measures
• A range of instruments and targets exist
• Costs can be high for manufacturers, society and consumers – yet
costs to consumers, given fuel savings, are sometimes negative.
• Trading can help reduce costs – there are different winners and losers
depending on targets and instruments
• Trading prices most likely to be higher than EU-ETS.
• IF there is to be a car CO2 trading scheme best to keep separate –
different units, and link will reduce reductions from automotive sector +
note also more CO2 leakage to outside EU from EU-ETS than cars ET.
• There is still controversy over exactly how much it will cost.
• There is no controversy that cars specific CO2 needs reducing further.

36.
The CO2 Challenge for Passenger Cars in Europe
and the Potential Role and Impacts of Emissions
Trading
Thank You!
Any Questions?
Patrick ten Brink
Senior Fellow and Head of Brussels Office
Institute for European Environmental Policy (IEEP)
ptenbrink@ieep.eu
www.ieep.eu